The finance ministry has said the Reserve Bank of India’s “one-size-fits-all approach” under its February 12 circular may not be the most suitable response to deal with massive number of stressed assets in the power sector.

The RBI’s February circular stipulates a one-day default rule on term loans, which mandates treating a borrower who misses repayments as a defaulter the very next day.

The finance ministry has said the Reserve Bank of India’s (RBI) “one-size-fits-all approach” under its February 12 circular may not be the most suitable response to deal with massive number of stressed assets in the power sector. It has suggested that banks be given one year instead of six months from the date of default by an entity, as stipulated by the RBI for all sectors, to start bankruptcy proceedings against the defaulter in a bid to save stressed power assets worth billions of dollars from being dragged to the National Company Law Tribunal (NCLT) by as early as September.

In a report dated July 18, reviewed by FE, the ministry has, however, recognised the view of the central bank and power players that the stress is caused by factors cutting across sectors, and recommended that a high-level panel be set up to expeditiously resolve such issues.

Arguing against any special relief and questioning the motive for which restructuring of certain power assets were done in the past, the RBI has said it is open to considering the suggestion by REC (Rural Electrification Corporation) for setting up an asset reconstruction company (ARC) to take over the banks’ stressed power assets.

“The proposal should be premised on a ‘level-playing field’ agnostic of public/private ownership, and based on a transparent price discovery,” the finance ministry report said, attributing the suggestion to the RBI.
The power ministry is finalising the government’s stance, taking into account the finance ministry report and additional inputs from stakeholders, which will be submitted with the Allahabad High Court when it next hears on August 2 a case filed by power producers against the RBI’s circular. The finance ministry’s report was based on its meeting with various stakeholders, including the ministries of power, coal and petroleum, the RBI and power producers.

A lot rides on this case, as a verdict against power producers will see huge amount of stressed projects (where defaults were made before March 2018) being referred to the NCLT by September. As such, a fifth of Rs 10.3 lakh crore gross non-performing assets in the banking system belong to the power sector, according to an industry estimate.

In the report, the finance ministry appreciated the intention of the RBI’s circular to promote credit quality and discipline in the system but added: “At the same time, it needs to be recognized that power assets, especially operational projects, represent economic value for the nation and consumers. Therefore ‘one size fits all’ approach may not be the most suitable approach, considering the varying degrees of complexity of the issues. A nuancing of approach, contingent upon unambiguous and reasonable categorization may perhaps be warranted.”

So it recommended that an additional 180 days, beyond the timelines prescribed under the RBI’s circular dated February 12, 2018, be allowed to thermal power projects that have been commissioned by February 12, 2018, and have not yet been admitted or referred to NCLT. “This would provide an opportunity for the HLEC (high-level empowered committee) to address sectoral constraints and provide a window for such assets to optimise their operations. Banks would carry out more intensive monitoring of the account and its cash flows to mitigate any further possibilities of slippages, during this period,” the ministry said in the report. Payment by discoms to independent power producers of pending dues of Rs 14,000 crore could lead to a sizeable debt repayment, it added.

The RBI’s February circular stipulates a one-day default rule on term loans, which mandates treating a borrower who misses repayments as a defaulter the very next day. It requires banks to finalise a resolution plan in case of a default on large accounts of Rs 2,000 crore or more within 180 days (irrespective of sectors), failing which insolvency proceedings will have to be invoked against the defaulter. Since the deadline for the resolution of the first set of such cases is end-August, power producers have been seeking urgent relief.

For its part, the RBI stressed that the “woes of private power producers lie in the realm of the real economy and public policy changes and not in the banking sector”. “Something has been amiss in the manner in, or motives for which, the earlier restructurings were done,” it said. Deep-seated problems of the power sector are likely to take long to be resolved and the financial sector cannot ignore the stress on its books in the interim, the central bank has argued.

The power sector players have argued that most of the factors that have caused the bad loans to pile up are beyond their control, including irregular payments from electricity distribution companies, shortage in fuel supplies and regulators delay in raising power tariffs.